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ILLINOIS: An Introduction to Construction

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As the initial impacts of the COVID-19 pandemic abate, the construction economy in Illinois is still facing headwinds based on macroeconomic factors that may be related to the aftereffects of the pandemic. Significant inflation, persistent skilled labor shortages (in some areas at least) and supply chain disruption challenge project underwriting for new projects and contractors’ performance on existing projects. Nevertheless, it appears that demand for projects in Illinois remains strong across key sectors. Aside from economics, there has been at least one significant legislative development that impacts general contractors and their exposure to liability for the payment of wages owed to employees of subcontractors.

Price Escalation and Supply Chain Disruption

Estimating the costs of construction materials – especially for multi-year construction projects – has long been the key to a project’s success. Unfortunately, it has never been an easy task. The current climate – which includes tariffs on foreign goods, trade wars and extraordinary supply chain disruptions triggered by the pandemic – has made this already difficult undertaking seem nearly impossible. The war in Ukraine, by all accounts, has further exacerbated overall inflationary pressures on the world markets especially on oil and gas prices.

Skyrocketing or, equally challenging, erratic and ever-changing prices for lumber, copper, iron and steel have presented significant obstacles and wreaked havoc on the industry. Construction stakeholders have been forced to ask some very hard (and very costly) questions like, who is going to pay for this, who bears the risk of exorbitant and unexpected price escalations and delay, and how can industry players mitigate future, potentially bank-breaking, price escalation risks?

In an effort to answer some of these questions, stakeholders are increasingly considering and implementing price escalation clauses in their construction contracts as a way of hedging against, or more equitably sharing, the risk of cost increases. Price escalation clauses are contractual provisions that provide an avenue for contract adjustment when material prices increase or decrease during the life of the project. In addition, owners are asking that contractors shoulder some of this risk rather than simply transfer all of the price risk to the owner.

There are two main types of price escalation clauses: delay or event price escalation clauses and percent change price escalation clauses. Delay/event price escalation clauses involve a specific event or delay, which when triggered, allow the affected party to seek reimbursement for the increased costs. Though the triggering event or delay may be the conduct of one of the parties (for example, a party default), they are more commonly due to external actors (for example, natural disasters, acts or omissions caused by other contractors or the project owner, or a global pandemic like we have now). Percent change price escalation clauses involve a specified percentage increase in a budgeted cost, and when properly triggered, typically allow the affected party to recover the increased cost.

Skyrocketing prices during contract performance could have dire consequences for the party left holding the bag. Price escalation clauses have allowed industry players a more collaborative way to equitably distribute the risk of unforeseen cost increases during this unprecedented time.

Even when pricing is not so volatile, supply chain disruption has made scheduling of construction projects difficult. Materials or equipment that may have had a lead time of 12 weeks in the past now takes 2 or 3 times longer to deliver. This reality can lengthen project schedules which in turn increases time-related costs. Re-sequencing work is an option but in many cases that can only accomplish so much to overcome schedule delays.

Federal Infrastructure Funding: What It Means for Illinois

In November 2021, President Joseph Biden signed into law the Infrastructure Investment and Jobs Act (the “Act”), a five-year, $1.2 trillion bill that represents the nation’s largest investment in infrastructure in decades. The Act provides funding to repair and upgrade a variety of infrastructure assets throughout the country. The categories of infrastructure eligible for funding include:

• bridges

• roads

• railways

• aviation facilities

• navigable waterways

• transit

• dams

• drinking water delivery systems

• energy plants

• port facilities

• others

For years, construction industry professionals clamored for federal funding to address rapidly deteriorating infrastructure throughout the nation. The American Society of Civil Engineers (ASCE) has published periodic “report cards” on the state of the country’s infrastructure. In 2021, the nationwide grade was a “C-”. The state of Illinois infrastructure is in line with the woeful state of infrastructure nationwide. The most recent ASCE report for Illinois, issued in 2018, also graded Illinois infrastructure at a “C-”. Illinois railways fared slightly better by garnering a “C+” but, as Illinois serves as the crossroads for much of the nation’s freight rail traffic, that grade is not encouraging. Illinois clearly needs upgrades across all of its infrastructure.

How much and how quickly infrastructure funds will flow to Illinois remains to be seen. Early reports indicated that Illinois could receive up to $18 billion under the Act. According to information released from U.S. Senators Dick Durbin and Tammy Duckworth, the estimated infrastructure funding to Illinois might consist of the following:

• Roads and bridges: $9.8 billion for federal-aid highway apportioned programs and $1.4 billion for bridge replacement and repairs. Illinois will be eligible for billions more in competitive grant programs.

• Public transportation: $4 billion over five years to improve public transportation options across the state.

• Broadband: A minimum allocation of $100 million to help provide broadband coverage across the state, including providing access to the 228,000 (or more) Illinoisans who currently lack it.

• Electric vehicles: $149 million over five years to support the expansion of an electric vehicle (EV) charging network in the state. Illinois is eligible for $2.5 billion in competitive EV charging grants.

Wage Collection and Payment Act: A New Wrinkle for Contractors

In April, 2022, the Illinois General Assembly passed an amendment to the Wage Payment and Collection Act that now awaits the governor’s signature. Under this amendment, for all construction contracts entered into on or after July 1, 2022 for private construction, general contractors (with one significant exemption) will be liable to a claimant who asserts that the claimant is owed wages for labor or services provided to a subcontractor of any tier. In addition, the general contractor will also be exposed to liability for related fringe benefits, interest, penalties and reasonable attorneys’ fees but not liquidated damages. The amendment also provides that a subcontractor who is responsible for the non-payment to a claimant shall indemnify the general contractor for liability that the general contractor faces as a result of such non-payment. The major exemption to the reach of this amendment is for general contractors who are parties to a collective bargaining agreement on the project where the work is being performed.